Deck 24: Quantitative Models for the Planning and Control of Inventories

Question 1

Figure 24-2
Hapsburg Manufacturing purchases components produced by Little Company in the manufacture of its main product. For the next year, Hapsburg expects to use a total of 20,000 parts. Hapsburg typically orders 2,000 units at a time. The cost of placing an order is £100, and the average annual cost of carrying one unit of inventory is £5.
Refer to Figure 24-2. Hapsburg's total ordering cost is

A)£1,000.
B)£5,000.
C)£10,000.
D)£500.

Answer 1

A

Question 2

Figure 24-1
Mrs. Brown's Bagel Company manufactures specialty bagels. The company buys flour in 50-kg bags that cost £25 each. The company uses 10,000 bags per year, and usage occurs evenly throughout the year.
The average cost to carry a 50-kg bag in inventory per year is £4, and the cost to place an order is £10.
The company works 250 days per year.
Mrs. Brown's Bagel Company manufactures specialty bagels. The company buys flour in 50-kg bags that cost £25 each. The company uses 10,000 bags per year, and usage occurs evenly throughout the year.
The average cost to carry a 50-kg bag in inventory per year is £4, and the cost to place an order is £10.
The company works 250 days per year.
Refer to Figure 24-1. If Brown's lead time is three working days and the average rate of usage is 40 bags per day, the reorder point would be

A)140 bags.
B)120 bags.
C)100 bags.
D)80 bags.

Answer 2

B

Question 3

Safety stock is an attempt to manage fluctuations in

A)inventory price.
B)demand.
C)lead time.
D)all of the above.

Answer 3

B

Question 4

Figure 24-1
Mrs. Brown's Bagel Company manufactures specialty bagels. The company buys flour in 50-kg bags that cost £25 each. The company uses 10,000 bags per year, and usage occurs evenly throughout the year.
The average cost to carry a 50-kg bag in inventory per year is £4, and the cost to place an order is £10.
The company works 250 days per year.
Mrs. Brown's Bagel Company manufactures specialty bagels. The company buys flour in 50-kg bags that cost £25 each. The company uses 10,000 bags per year, and usage occurs evenly throughout the year.
The average cost to carry a 50-kg bag in inventory per year is £4, and the cost to place an order is £10.
The company works 250 days per year.
Refer to Figure 24-1. Brown's economic order quantity is

A)354 bags.
B)447 bags.
C)224 bags.
D)100 bags.

Question 5

JIT reduces lead times to meet delivery dates by

A)reducing setup times.
B)expediting delivery to customers.
C)having more inventory available.
D)working overtime to fill orders.

Question 6

One of the traditional reasons for holding inventory is to minimize total carrying costs and setup costs. The JIT solution is to

A)reduce setup costs.
B)reduce lead time.
C)use total preventive maintenance.
D)use total quality control.

Question 7

The cost of interrupted production is considered part of the

A)setup cost.
B)ordering cost.
C)carrying cost.
D)stockout cost.

Question 8

The reorder point for inventory depends upon which of the following factors?

A)the economic order quantity
B)the lead time between placing an order and its availability for use
C)the rate of usage during lead time
D)all of the above

Question 9

Ordering frequently in small lot sizes minimizes

A)ordering cost.
B)carrying cost.
C)stockout cost.
D)all of the above.

Question 10

The reorder point for inventory is calculated as

A)Rate of usage * Lead time.
B)(Maximum usage + Average usage) * Lead time.
C)(Maximum usage - Average usage) * Lead time.
D)none of the above.

Question 11

Which of the following is NOT considered an ordering cost?

A)inventory taxes
B)insurance cost on shipment
C)cost of processing an order
D)unloading costs

Question 12

Economic order quantity refers to the order size that

A)minimizes the size of the order.
B)minimizes the carrying costs associated with inventory.
C)minimizes total inventory costs.
D)minimizes the ordering costs associated with inventory.

Question 13

Figure 24-1
Mrs. Brown's Bagel Company manufactures specialty bagels. The company buys flour in 50-kg bags that cost £25 each. The company uses 10,000 bags per year, and usage occurs evenly throughout the year.
The average cost to carry a 50-kg bag in inventory per year is £4, and the cost to place an order is £10.
The company works 250 days per year.
Mrs. Brown's Bagel Company manufactures specialty bagels. The company buys flour in 50-kg bags that cost £25 each. The company uses 10,000 bags per year, and usage occurs evenly throughout the year.
The average cost to carry a 50-kg bag in inventory per year is £4, and the cost to place an order is £10.
The company works 250 days per year.
Refer to Figure 24-1. If Brown's lead time is four working days, the average rate of usage is 40 bags per day, and the company carries a safety stock of 20 bags, the reorder point would be

A)180 bags.
B)140 bags.
C)160 bags.
D)100 bags.

Question 14

JIT avoids shutdowns due to materials shortages in all of the following ways EXCEPT

A)using total preventive maintenance.
B)holding inventory.
C)using total quality control to reduce defective materials.
D)working with suppliers to ensure the availability of materials.

Question 15

If inventory is purchased from an outside supplier, the inventory-related costs are

A)ordering and carrying costs.
B)setup and carrying costs.
C)ordering and setup costs.
D)none of the above.

Question 16

JIT purchasing is done using

A)short-term contracts that emphasize price.
B)long-term contracts based on quality, reliability, and price.
C)short-term contracts based on quality, reliability, and price.
D)inventory to hedge against stockouts and price increases.

Question 17

If inventory is produced internally, the inventory-related costs are

A)ordering and carrying costs.
B)setup and carrying costs.
C)ordering and setup costs.
D)none of the above.

Question 18

Placing large, infrequent orders minimizes

A)ordering cost.
B)carrying cost.
C)stockout cost.
D)all of the above.

Question 19

Figure 24-2
Hapsburg Manufacturing purchases components produced by Little Company in the manufacture of its main product. For the next year, Hapsburg expects to use a total of 20,000 parts. Hapsburg typically orders 2,000 units at a time. The cost of placing an order is £100, and the average annual cost of carrying one unit of inventory is £5.
Refer to Figure 24-2. Hapsburg's total inventory cost is

A)£5,100.
B)£6,000.
C)£10,000.
D)£20,000.

Question 20

Figure 24-2
Hapsburg Manufacturing purchases components produced by Little Company in the manufacture of its main product. For the next year, Hapsburg expects to use a total of 20,000 parts. Hapsburg typically orders 2,000 units at a time. The cost of placing an order is £100, and the average annual cost of carrying one unit of inventory is £5.
Refer to Figure 24-2. Hapsburg's total carrying cost is

A)£100,000.
B)£10,000.
C)£50,000.
D)£5,000.

Question 21

Merrill Manufacturing produces stainless steel sinks. In order to produce the sinks, special equipment must be set up. The setup cost per sink is £10. The cost of carrying sinks in inventory is £1.25 per sink per year. The company produces 50,000 sinks per year.
a.Compute the number of sinks that should be produced per setup in order to minimize the total setup and carrying costs.
b.Compute the total setup and carrying costs associated with the economic order quantity. (Round to the nearest £.)

Question 22

Bernard Company uses 6,000 grams of silver each year to produce jewelry. The cost of placing an order is £2,000. The annual cost of holding one gram of silver is £50. Bernard currently places four orders of 1,500 grams each.
a.Compute the annual cost of the current inventory policy.
b.Compute the cost that Bernard would incur if it used economic order quantity.
c.Compute the amount that Bernard would save if it used economic order quantity rather than the current policy.

Question 23

Figure 24-5
Big Bus Company produces buses. In order to produce the seats for the buses, special equipment must be set up. The setup cost per frame is £40. The cost of carrying seats in inventory is £5 per seat per year. The company produces 100,000 buses per year.
Refer to Figure 24-5. Total setup costs associated with the economic order quantity are

A)£3,953.
B)£3,612.
C)£3,162.
D)£1,778.

Question 24

Figure 24-4
Buckner Manufacturing purchases components produced by Cochran Company in the manufacture of their main product. For the next year, Buckner expects to use a total of 30,000 parts. Buckner typically orders 500 units at a time. The cost of placing an order is £40, and the average annual cost of carrying one unit of inventory is £2.
Refer to Figure 24-4. Buckner's total inventory cost is

A)£2,900.
B)£1,000.
C)£3,400.
D)£2,000.

Question 25

Which of the following is NOT an opportunity cost associated with inventory management?

A)lost sales to customers
B)use of capital tied up in inventory investment
C)cost of expediting
D)all are opportunity costs

Question 26

March Manufacturing uses an average of 150 components per day, although usage can run as high as 175 components per day. If lead time is three days, how much safety stock should March have on hand?

A)75 components
B)450 components
C)510 components
D)150 components

Question 27

Nazca Company uses 48,000 grams of silver each year to produce jewelry. The cost of placing an order is £150. The annual cost of holding one gram of silver is £3. Nazca currently places 12 orders of 4,000 grams each.
a.Compute the annual cost of the current inventory policy.
b.Compute the cost that Nazca would incur if it used economic order quantity.
c.Compute the amount that Nazca would save if it used economic order quantity rather than the current policy.

Question 28

Evans Company has the following information: $\begin{array}{ll}\text { Annual demand } & 4,000 \text { units } \\\text { Order size } & 1,000 \text { units } \\\text { Ordering cost per order } & £ 500 \\\text { Carrying costs per unit for one year } & £ 50 \\\text { Lead time (maximum } 20 \text { days) } & 10 \text { days } \\\text { Maximum daily use } & 25 \text { units } \\\text { Work year } & 250 \text { days }\end{array}$
a.Determine the economic order quantity for Evans.
b.What is the annual savings to Evans Company if it was to change from an order size of 1,000 to the economic order quantity?
c.What is the reorder point?
d.What is the safety stock needed to prevent stockouts?

Question 29

Brock Manufacturing uses an average of 2,000 units per day, although usage can run as high as 2,500 units per day. If Brock maintains a recommended amount of safety stock and lead time is four days, what is Brock's reorder point?

A)12,000 units
B)10,000 units
C)8,000 units
D)2,000 units

Question 30

Figure 24-4
Buckner Manufacturing purchases components produced by Cochran Company in the manufacture of their main product. For the next year, Buckner expects to use a total of 30,000 parts. Buckner typically orders 500 units at a time. The cost of placing an order is £40, and the average annual cost of carrying one unit of inventory is £2.
Refer to Figure 24-4. Buckner's total carrying cost is

A)£1,000.
B)£500.
C)£2,400.
D)£2,900.

Question 31

Figure 24-3
Cozy Stoves produces wood-burning stoves. In order to produce the frames for the stoves, special equipment must be set up. The setup cost per frame is £40. The cost of carrying frames in inventory is £5 per frame per year. The company produces 100,000 stoves per year.
Refer to Figure 24-3. Cozy Stoves' total setup costs associated with the economic order quantity are

A)£3,953.
B)£3,612.
C)£3,162.
D)£1,778.

Question 32

Perch Pro Shops sells an average of 200 lures per day. The lead time required to receive lures from the supplier is four days. What is Perch's reorder point?

A)100 lures
B)200 lures
C)300 lures
D)800 lures

Question 33

Figure 24-5
Big Bus Company produces buses. In order to produce the seats for the buses, special equipment must be set up. The setup cost per frame is £40. The cost of carrying seats in inventory is £5 per seat per year. The company produces 100,000 buses per year.
Refer to Figure 24-5. The number of seats that should be produced per setup in order to minimize the total setup and carrying costs is

A)2,828 seats.
B)1,265 seats.
C)894 seats.
D)566 seats.

Question 34

Enchanted Acres sells an average of 6,000 bags of flower seed daily. The lead time required to receive seed from the supplier is four days. What is Enchanted Acres' reorder point?

A)1,500 bags
B)6,000 bags
C)12,000 bags
D)24,000 bags

Question 35

July Manufacturing uses an average of 150 units per day, although usage can run as high as 175 units per day. If July maintains a recommended amount of safety stock and lead time is three days, what is July's reorder point?

A)450 units
B)510 units
C)525 units
D)600 units

Question 36

Figure 24-3
Cozy Stoves produces wood-burning stoves. In order to produce the frames for the stoves, special equipment must be set up. The setup cost per frame is £40. The cost of carrying frames in inventory is £5 per frame per year. The company produces 100,000 stoves per year.
Refer to Figure 24-3. The number of frames that Cozy Stoves should produce per setup in order to minimize the total setup and carrying costs is

A)2,828 frames.
B)1,265 frames.
C)894 frames.
D)566 frames.

Question 37

Kali Manufacturing uses an average of 2,000 components per day, although usage can run as high as 2,500 components per day. If lead time is four days, how much safety stock should Kali have on hand?

A)10,000 components
B)8,000 components
C)2,500 components
D)2,000 components

Question 38

Figure 24-4
Buckner Manufacturing purchases components produced by Cochran Company in the manufacture of their main product. For the next year, Buckner expects to use a total of 30,000 parts. Buckner typically orders 500 units at a time. The cost of placing an order is £40, and the average annual cost of carrying one unit of inventory is £2.
Refer to Figure 24-4. Buckner's total ordering cost is

A)£120.
B)£2,000.
C)£2,400.
D)£500.

Question 39

Figure 24-3
Cozy Stoves produces wood-burning stoves. In order to produce the frames for the stoves, special equipment must be set up. The setup cost per frame is £40. The cost of carrying frames in inventory is £5 per frame per year. The company produces 100,000 stoves per year.
Refer to Figure 24-3. Cozy Stoves' total carrying costs associated with the economic order quantity are

A)£3,612.
B)£3,162.
C)£506.
D)£316.

Question 40

Following is information pertaining to material that is used in the assembly of automobiles: $\begin{array}{ll}\text { Annual demand } & 4,000 \text { units } \\\text { Unit cost } & £ 25 \\\text { Cost of placing an order } & £ 600 \\\text { Carrying cost as a percentage of unit cost } & 10 \%\end{array}$
a.Calculate total annual carrying costs for an order quantity of 200 units per order.
b.Calculate total annual ordering costs for an order quantity of 200 units per order.
c.Determine the optimal order size.